Tuesday, July 28, 2009

The Least Helpful Call you will receive today is so un-helpful as to be almost unbelievable.

But since we here at NotMakingThisUp strive not to make things up, well, here goes:

Barclays is today upgrading Varian from “Underweight” to “Equal Weight.”

For those of you who recall something about Varian being lately in the news, you are correct. Just yesterday, the medical and scientific equipment maker announced it had agreed to be acquired by Agilent Technology, for $52 a share.

Varian's stock rose $11.41 yesterday to a closing price of $50.61—bringing its total gain from its March 9 low of $19.83 to a healthy $30.78.

Apparently, the sudden move from “Underweight” to “Equal Weight,” after $30.78 a share in gains in the last four months, is due to the fact that there’s still $1.39 a share in gains to be had, assuming Agilent gets the necessary approvals to complete the tender by the expected close of December 31.

Which is why the Barclays upgrade of Varian is, we have no doubt, the Least Helpful Call you will receive today.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Monday, July 27, 2009

New-Home Sales in U.S. Climbed 11% in June, Most in Eight Years
By Courtney Schlisserman

July 27 (Bloomberg) -- Purchases of new homes in the U.S. climbed 11 percent in June, the biggest gain in eight years, adding to evidence the slump that began in 2005 is stabilizing.

Sales increased to a 384,000 pace, higher than any forecast of economists surveyed by Bloomberg News and the most since November, figures from the Commerce Department showed today in Washington. The number of houses on the market dropped to the lowest level in more than a decade….

Builders had 281,000 houses on the market last month, down 4.1 percent from May and the fewest since February 1998. The number of unsold inventory fell a record 36 percent from June 2008. It would take 8.8 months to sell all homes at the current sales pace, the lowest level since October 2007.—Bloomberg

Back in April we published “Stress Test On, Crisis Over.”

The crux of “Stress Test Etc.” was that since the government was finally getting around to stress-testing the banks, the financial crisis must be over.

This prompted a swift reaction and much disbelief— “Sold to YOU” being the most memorable, and the most printable of the negative responses—along with a why-are-you-so-hard-on-Democracy lament.

But the point of “Stress Test Etc.” was not some knee-jerk reaction against Government policies in general and the then-unpopular Treasury Secretary in particular.

It was 30 years worth of experience watching politicians react years too late to whatever it was they should have been reacting to a long time ago if they had really wanted to do anything about it.

By way of example, recall the Sarbanes-Oxley legislation, which only came out after WorldCom and Enron had gone down in flames—and which did absolutely nothing to prevent a far worse level of financial chicanery to infiltrate Wall Street and very nearly bring down Main Street by the time the dust had settled.

But the dust has indeed settled—after record-breaking government intervention in financial markets—and Main Street is getting back on its feet.

Witness today’s new home sales. But even more interesting than today’s home sales is the Agilent-for-Varian Inc. acquisition.

Agilent is paying $1.5 billion in cash for Varian, which makes all kinds of lab equipment. That amounts to almost 12-times Varian’s trailing EBITDA, which equates to an 8.3% pre-tax, gross yield on its purchase price.

And that’s an extremely hefty price to pay except when you consider with what Agilent is earning on its cash these days—which is probably less than 1%.

If corporate America seems to think—as home-buyers now seem to be thinking—that the time is right to convert low-earning cash into a higher-earnings hard asset, we’re in for a surprisingly strong recovery.

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Thursday, July 23, 2009

Given role of rating agencies in the current economic crisis, their use of flawed models…why do you retain such a large holding in Moody’s?

Warren Buffett:

In terms of selling their [Moodys’] stock, the odds are the ratings agencies are still a good business…. There are very few people in it, it affects a large portion of the economy, and it’s a business that doesn’t require capital, so it has the fundamentals of a pretty good business. Capital markets are gonna grow over time.

—Berkshire Hathaway Shareholder Meeting, May 2, 2009

So Andrew Ross Sorkin asked, and Warren Buffett responded to, one of the better questions asked at this year’s Berkshire Hathaway shareholder meeting.

And exactly 80 days later, The Oracle of Omaha changed his mind.

In a 13D that hit the tape last night after the market close, Berkshire disclosed the sale of precisely 7,986,300 shares of Moody’s common, at prices ranging from $26.59 to $28.73 over the course of July 20 to July 22, leaving Berkshire with a still nothing-to-sneeze-at 40 million share ownership position in what Buffett told shareholders remained “a pretty good business,” and some of Wall Street's Finest wondering what it means

Interestingly enough, the prices Buffett chose to sell at (and he is an extremely price-sensitive investor) were lower than prices available the week after the Berkshire meeting, when the stock traded above $30.

Clearly, something has changed.

Perhaps Buffett has come to concur with David Einhorn.

Einhorn is proprietor of hedge fund Greenlight Capital, and readers may recall that Einhorn was the genius who tried to warn the Feds and anyone else who would listen that Lehman Brothers was primed to fail.

By way of thanks for that unheeded warning, naturally, the Feds have decided to regulate more hedge funds.

In any event, by way of notes that circulated around Wall Street the following day, here's how Einhorn explained why his firm was short Moody’s stock at the Ira W. Sohn Investment Research Conference, just a few weeks after Buffett reassured shareholders at the annual meeting:

The theme of David Einhorn’s presentation was the curse of the AAA…. Einhorn took to task Chairman Bernanke’s assertion that AIG failed because there was a hedge fund at the top of an insurance company. AIG failed because it was not a hedge fund, but a AAA-rated highly rated regulated insurance company. This status gave false security to investors and counterparties. Hence the curse of the AAA: most of the institutions that ran into major trouble were AAA rated entities. Fannie, Freddie, AIG, monolines, GE all were AAA-rated.

Einhorn says he is betting against Moody’s (MCO). He describes the situation as such: if your highest rating is a curse of those who have it, what value do you have? If your goal is to destroy the brand, would you do anything differently than Moody’s has done? Why reform them if we can get rid of them? Ratings system is inherently pro-cyclical and destabilizing. Regulators can improve the stability of the financial system by eliminating the ratings agencies. Company is 19x estimated earnings, balance sheet is upside down with negative shareholder equity.

Perhaps Buffett now agrees with Einhorn: if ratings are useless, what’s the value of a ratings agency?

In any event, William Blair, a sober investment house if ever there was one, isn’t waiting around to learn what changed Buffett’s mind.

Only two days after reaffirming an “Outperform” rating on the stock, they’ve downgraded Moody’s shares—“Reluctantly,” according to the headline of the piece (you never want to alienate management, even after the Crisis of 2008)—to a “Market Perform.”

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Monday, July 20, 2009

WASHINGTON -- House Democrats on Tuesday unveiled sweeping health-care legislation that would hit all but the smallest businesses with a penalty equal to 8% of payroll if they fail to provide health insurance to workers.

The House bill, which also would impose new taxes on the wealthy estimated to bring in more than $544 billion over a decade, came as lawmakers in the Senate raced against a self-imposed deadline of this week to introduce a bill in time for action this summer….

Mr. Obama said Monday that he is buoyed by progress on health legislation -- which House Democratic leaders intend to move to the floor later this month -- but made clear that he knows a tough road lies ahead. "I've got no illusions that it's going to be easy to get over the finish line," he said.

—The Wall Street Journal

There is a short-term parking lot at JFK that I never use if I don’t have to.

It is the parking lot at Terminal 4, which happens to be home to Virgin Atlantic and other, less familiar, international airlines, such as Taca International (with flights to and from San Salvador), for example, LOT (flights to and from Warsaw), and Jordanian Airlines, with flights between Amman and JFK.

Passengers emerge from the gates at Terminal 4 groggy and glazed-eyed, for they have made long, time zone-crossing flights from exotic capitals around the world, often with kids in tow and frequently with what seem to be their life’s belongings. They wander around the concourse, often with cell phones clamped to their ears, either looking for the family or friends meant to meet them in the sudden chaos of New York City, or else trying to find their way to the right car, or bus, or subway line.

It’s what helps makes New York, well, New York.

Besides being a kind of United Nations in miniature—only less blatantly corrupt, and far more productive than the real thing—Terminal 4 happens to be the only non-airline, privately-operated terminal at JFK.

Full of airy spaces and dozens of shops, Terminal 4 is, as it is advertised to be, “one of the most modern, efficient, spacious and unique terminals in the New York area,” and “A Model for 21st Century Air Travel.”

A model, that is, until you try to leave the joint.

It is then, as those groggy, glazed travelers leave the air-conditioned confines of the Terminal and approach the passenger pick-up area on the road, that things get less “modern, efficient, spacious and unique.”A sea of cars, vans, window-blackened stretch limos and beat-up Honda Civics cruise slowly along, looking for spaces that may or may not open up, as well as whoever it is they’re supposed to pick up, while keeping a cynical eye out for the airport traffic cops of the Port Authority of New York and New Jersey—for it is the Port Authority of Etcetera, Etcetera which unfortunately operates the outside of Terminal 4.

And with the government involved, things get less modern and efficient.The traffic cops of the Port Authority of Etcetera, Etcetera appear and disappear and reappear at odd moments, with no regularity. Their sole job seems to be to chase away cars on the theory that drivers who need to wait for short periods of time should park in the short-term parking lot at Terminal 4.

And since nobody in their right mind wants to park in the short-term parking lot at Terminal 4, it is an endless cycle of traffics cops suddenly appearing to chase away cars, until they disappear. Then the cars return after circling the airport, until the traffic cops reappear, and it starts all over again.

Now, the reason nobody in their right mind wants to park in the short-term parking lot at Terminal 4 is because the short-term parking lot at Terminal 4 is even less efficient than the disappearing/reappearing traffic cop routine.

This is not for lack of parking spaces—the parking lot itself has plenty of spaces. And it is not for lack of toll booths for leaving the parking lot—there are nine.

The problem is in the management of those toll booths.

Apparently, the State Senator whose brother-in-law skims the toll booth take at Terminal 4 needs to employ as many relatives of the guy at the Port Authority of Etcetera, Etcetera who gave him the contract as possible, in order to keep the contract.How else to explain why each one of those nine toll booths takes E-Z-Pass, or credit cards, or cash...which means that each toll booth must be staffed, or else no cars can go through?Of course, because of this ridiculously inefficient layout, each lane can get blocked if somebody forgot their wallet, or didn’t bring enough cash, or lost their ticket, or didn’t bring the E-Z-Pass...which seems to happens every time more than one car is waiting in line.

Now, this would not necessarily be a huge problem, except the State Senator whose brother-in-law skims the toll booth take at Terminal 4 also employs somebody to do meaningless tasks—like wash the toll booth windows while everybody is stuck in line—because apparently it is terribly important that the windows of the toll booths be cleaned…really slowly...while the cars wait for the toll booth lanes to become unblocked.And this only serves to mock the drivers of the cars blocked at the toll booths, until all the drivers stuck in line want to shoot somebody.

Now, fortunately for other flyers at JFK, that same State Senator of Terminal 4 fame does not have the parking contract for JFK's Terminal 7.

Terminal 7, which is a mere few hundred yards across the tarmac from Terminal 4, is the sparkling home of British Air. It has a youthful, business-like demeanor—entirely international but not so much of the United Nations as maybe of Davos in its prime.

Terminal 7 has no such crowded, mindless, endless traffic looping, as does Terminal 4, for the simple reason that Terminal 7 has a great short-term parking lot. Easy in, easy out—with a credit card lane, and an E-Z-Pass lane; and they both work. There never seems to be a line. You can park, go inside the terminal and meet an arriving passenger, then leave the parking lot without feeling trapped and wanting to shoot somebody.

Now, you might think somebody would get with the program. But you’re dealing with the Government. Specifically, you’re dealing with the Port Authority of Etcetera, Etcetera. More specifically, you’re dealing with that powerful State Senator’s brother-in-law who skims the parking lot concession at Terminal 4.

All of which is to raise the question: why the rush with healthcare reform?

Why the “self-imposed deadline” to pass a bill to regulate the most complex manifestation of government involvement in human commerce, in a couple of weeks?

Will a government that can’t manage a simple toll booth at a parking lot be able to figure out how best to provide affordable healthcare coverage to all Americans—let alone those new Americans arriving daily at Terminal 4 at JFK—in a couple of weeks?

Is the point here to pass regulations in a particular period of time, for a short-term political gain, or is it to craft a healthcare system that actually functions well in 5 and 10 and 20 years?

And, along those lines, where’s the analysis behind the regulations?

Talking heads and Nobel economists talk up healthcare systems in Canada, the UK, and France as if every retiree in those countries is rosy-cheeked and doing one-handed pushups while they wait in line for their pension checks.

Where’s the data?

Bush’s Part D didn’t work: why will Obama’s fix work any better?

In the meantime, if you think health care is best managed by the government—well, then go ahead and park in Terminal 4.

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Thursday, July 16, 2009

Good afternoon. In today's call we will continue to use the word unprecedented to describe our environment. As a Company, we have never seen a change as abrupt as the one that has occurred in our E&C market since early September.The first break came in mid-September when demand dropped as a result of the meltdown in the financial markets….—Steven Berglund, CEO Trimble Navigation; February 3, 2009

Trimble Navigation is, for readers who don’t know the company, the Garmin or Tom-Tom of the agriculture and E&C (engineering and construction) businesses.

Steve Berglund, for readers who don’t know him, is about as straight-talking a CEO as they make.

And it was Berglund’s comments about the credit collapse from the company’s February conference call—especially “the first break in mid-September”—that played in our minds as we considered the following headline on our Bloomberg:

CIT, for readers who don’t know the company, is to the retailing and manufacturing businesses of America what Lehman Brothers—whose collapse triggered that “first break in mid-September” of 2008—was to hedge funds and commercial real estate developers.

And it was the collapse of Lehman Brothers that triggered the credit crisis Steve Berglund, in that same February call, described as forming “two distinct periods” in 2008:

Total year 2008 really consisted of two distinct periods. The first nine months were recession conditions and difficult.... The sharp break in the fourth quarter represented a major loss of confidence by businesses which constituted our primary customer business base.This resulted in businesses across the U.S. and Europe cutting back dramatically on investments. In practical terms, the E&C market has shut down rational decision-making while awaiting events.

Now, we hear at NotMakingThisUp are not suggesting CIT's problems will have any impact on Trimble Navigation. If CIT goes down, it will not be the engineering and construction business that will “shut down rational decision-making.”Rather, it will be thousands of small and middle market and large companies that borrow money and lease equipment from CIT that may well see a “shut down in rational decision-making.”

For CIT lends to manufacturers and wholesalers and distributors and importers and retailers and technology companies, and broadcasting, publishing, security, gaming, sports and entertainment companies.

And it provides credit to Small Business Administration borrowers.

In addition, CIT does business with “all of the U.S. and Canadian Class I railroads,” according to the CIT 10K. It leases hopper cars to ship grain, gondola cars for coal, open hopper cars for coal, and center beam flat cars for lumber through CIT.And CIT leases aircraft to airlines—23 aircraft placed in 2008, and 114 aircraft on order at the end of 2008—and it finances parts for defense companies.

And woe be the retailers who finance their accounts receivable through CIT—$42 billion worth in 2008—and the small commercial businesses who lease office equipment financed by CIT.

When Lehman went down, the Feds claimed they couldn’t get involved, even while they were preparing the necessary documents to take over AIG, the collapse of which would have brought down the world (see “Widespread Panic, Starting Today” from September 18, 2008).

CIT may not bring down the world, but its failure, we think, could well trigger an echo of the Lehman collapse.

Why the Feds are not prepared to help—a shut down in rational decision making in and of itself—we can’t fathom.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Wednesday, July 08, 2009

Being on a road trip, we’ll take what papers we can get. And today that means The New York Times.

Just last week in “Nobel Freakonomics” we mentioned the Times in a less-than-flattering light—i.e. that we haven’t been reading it for serious news since the publisher decided to cut costs by outsourcing the Times’ newsroom to the White House.

It was an off-hand joke. But apparently that’s exactly what happened, judging by what passes for today’s story on the Moscow summit.

“Obama Resets Ties to Russia, but Work Remains.”

That’s the headline, parroting directly the administration’s ceaseless ‘Reset Button’ yammering about everything it has been trying to disinherit from George Bush. Still, since that apparently didn’t sound upbeat enough to the White House, the Times adds a more pleasant, editorial-style subheading:

“A Trip Brings Progress but Fissures Persist.”

How, exactly, did this trip bring “progress” you wonder? Reading the story itself, the “progress” is unclear. Here’s how the Times describes it—and we are not making this up—in paragraph two:

But while Mr. Obama and President Dmitri A. MedvedevofRussiadeclared a reconciliation, they did so partly by agreeing to disagree on important issues and by selectively interpreting the same words in sharply different ways.

Substitute “Chamberlain” for “Obama” and “Hitler” for Medvedev,” and the Times might be describing what happened in Munich back in 1938.

But the Times does not stop with that howler, because it apparently did not suit the White House editor. How else to interpret the apparently thin-skinned Michael McFaul, Obama’s point man on Russia who told the reporters, quote/unquote:

“I dare you to think of a summit that was so substantive.”

Apparently, none of the reporters dared think of Reagan/Gorbachev.

In any event, the Times did not get to the verge of Chapter 11 by letting facts get in the way of its own, narrow-minded world-view, and since the headline promised “Progress,” the reporter gives us progress:

…the two leaders agreed to slash strategic nuclear arsenals, resume military contacts suspended after the war with Georgia andopen an air corridoracross Russia for up to 4,500 flights of United States troops and weapons to Afghanistan each year.

Of these three, the first is a no-brainer for both sides; the second is a clear win for Putin, who gets to “reset” things to where they were before he invaded Georgia; and the third, while nominally a victory for Obama, is even better for Putin: who wouldn’t want to let us fight a war his own country demonstrated could not be won?

What other signs of “progress” came out of the summit that we are “dared” to question? Again, we making nothing up:

Mr. Obama and Mr. Medvedev announced an agreement to open a joint early-warning center to share data on missile launchings. But PresidentsBill Clintonand Boris N. Yeltsinannounced the same agreement in 1998. Mr. Clinton then announced it again with President Vladimir V. Putinin 2000. Mr. Putin and PresidentGeorge W. Bushrecommitted to it as recently as 2007.

And none of them ever actually built the center.

Wordsmithing aside, what you really need to know about the event might just as easily be summed up in the photograph of Putin and Obama at the top of the story.

Obama, back to the camera, is leaning earnestly towards Putin, who sits, legs open, with about as blank a look on his face as any ex-KGB agent ever held in any meeting with any President of any country. He looks like the same Vladimir Putin whose eyes George Bush once looked into and declared he had seen the man's non-existent “soul.”

It is no wonder the Times buried this description of the two men’s meeting well off the front-page:

Their breakfast ran two hours, and Mr. Putin spent the first half in a virtually uninterrupted monologue about Russia’s view of the world, aides said afterward.

Substitute “Hitler” for Putin, and once again you’re describing Munch.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Thursday, July 02, 2009

We were somewhere around Barstow on the edge of the desert when the drugs began to take hold…. —From “Fear and Loathing in Las Vegas” by Hunter S. Thompson.

So begins the best opening line to a book since…well, if there’s a better one, I can’t remember it.

And while the link between the musings of a drug-addled, gun-crazy journalist and that of Wall Street’s Finest might seem weak at best, we here at NotMakingThisUp nominate the following headline (from the indispensible Briefing.com) as Exhibit A in the Case that Hunter S. Thompson did not shoot himself dead, but is in fact working at Credit Suisse:

Credit Suisse says strong case to be made that both GS and MS are overcapitalized…

Seems that certain research minds at Credit Suisse are making a call that Goldman Sachs (GS is the ticker) and Morgan Stanley (MS) might have too much capital.

Why would anybody in their right minds suggest—after what we’ve been through—that two of the remaining U.S. brokerage firms-turned-banks have too much money?

Let’s look at the story:

Credit Suisse notes that it was fewer than nine months ago that many questioned the sustainability of U.S. brokerage business models and only earlier this year that many doubted the notion that investment banking business models could generate adequate returns over the cycle.

So far, so good. It was indeed not long ago that the world seemed ready to implode and nobody in the investment business expected to live to see the next up-cycle.

This, however, is as far as rational thought took the Credit Suisse folks.Then the drugs kicked in:

The firm now sees a strong case to be made that both GS and MS are overcapitalized. They estimate GS currently holds $6.6-8.6 billion of excess capital, equal in size to a buyback program for 8-11% of the co. They believe MS has the potential to repurchase up to $1.5 billion of its common stock (3% shares outstanding) with that opportunity materially expanding…—Briefing.com

It is true that Morgan Stanley and Goldman Sachs have shrunk their asset base from Bubble-era peaks of 33-times equity and 22-times equity, respectively, to a low-teens multiple of equity.That's a far more manageable chunk of leverage, and far less likely to require the Fed’s support down the road.

But given what we’ve just been through—i.e. the End of the World as We Knew It, to paraphrase R.E.M.—isn’t it a decade or two too soon for Wall Street’s Finest to be calling for the kind of mindless, capital-destroying, Returning-Value-To-Shareholders nonsense that got us into the crisis in the first place?

We here at NotMakingThisUp think so.

But not the normally sober folk at Credit Suisse—whose only excuse, as far as we can tell, is that the spirit of Hunter S. Thompson is alive and well and living among Wall Street’s Finest.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.